Large Hikes in Gold Holdings expected from China

Gold Demand is likely to rise amid the uncertainty about the stability of the US Dollar and the Euro, the main assets held by major central banks and sovereign funds globally, a report by the Official Monetary and Financial Institutions Forum (OMFIF) said. China, owner of the world’s largest foreign exchange reserves, may increase Gold Holdings to diversify away from the US Dollar, a researcher said. “There’s no reason why the Chinese central bank should hold a disproportionate amount of other countries’ reserve currencies such as the US Dollar,” David Marsh, chairman of the Official Monetary and Financial Institutions Forum, said today in an interview in Beijing. China holds the world’s largest foreign exchange reserves, which were worth more than $3.31 trillion by the end of 2012, according to figures from the People’s Bank of China, the country’s central bank. The amount is so large that China has no other currency options than holding US dollars and Euros. “It is likely that the Chinese authorities will carry on purchasing Gold in modest amounts and they will do it in a way calculated not to disturb the market.” “As China aspires to take the lead politically and economically, it is unlikely to be satisfied with storing its wealth simply in liabilities of other countries,” Marsh wrote in a report commissioned by the World Gold Council and published today. The Chinese Yuan, also known as Renminbi, is expected to emerge gradually as a new reserve currency along with its growing use in trade and investment, according to the report. “By the year 2020, the Renminbi will be the third-biggest, or one of the three biggest, reserve currencies in the world,” Marsh said in the interview.

China Renminbi - US Dollar to Gold Holdings

China will lead the Gold Reserves Building Game as US Dollar crashes:

According to Meghnad Desai, Chairman OMFIF, China weighs up its options for joining in the Reserve Asset game, Gold – the official asset that plays no formal part in the monetary system, yet has never really gone away – is poised, once again, to play a pivotal role. China almost doubled its Gold Reserves in the last five years. The country had holdings of 1,054 metric tons (Only Officially disclosed part) in July 2012 and is now the sixth-largest holder of monetary Gold. In 2011, Gold accounted for 14.4% of the world’s total monetary reserves. In a country-by-country comparison, the figure was 1.6% in China, while it was 74.5% in the United States, 71.4% in Germany and 71.1% in France, according to data from the World Gold Council and the International Monetary Fund. Driven by China’s desire to increase its financial clout, the Chinese Renminbi is likely to emerge gradually as a genuine international currency as the country has been easing restrictions on its use in transactions and investments abroad. “China has no wish to be unduly dependent on either the US Dollar or the Euro. This is likely to have been an important reason why the Chinese authorities have decided in recent years to boost the share in Gold Reserves,” the report said. Although the Renminbi’s rise as a reserve currency is unlikely to pose any immediate threat to the US dollar, “during this period of change and transition reserve holders will spread their investments into a relatively wide range of assets and sectors,” the report said. While the Official Monetary and Financial Institutions Forum does not envisage a return to a gold standard, Gold will increasingly have a renewed role in the global monetary system, attracting a higher level of attention from policymakers and financial market practitioners.

Chinese officials have spoken of China’s aspirations to have Gold Reserves as large as the U.S. in order to help position the Yuan or Renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term. The move is also part of the broader financial reforms that Beijing has launched in recent weeks, loosening some of the restrictions on securities investment and allowing banks to price loans at cheaper rates than in the past, that seek to grant market forces a bigger role in both the economy and the capital market.

China’s intention to significantly increase its Gold Reserves may be aimed at the suspected massive devaluation of the US Dollar. China is currently the main creditor of the US. China holds trillions of US Dollars and if it tries to convert part of these reserves into Gold, this will inevitably lead to a gigantic devaluation of the US dollar in the global financial markets. The US Dollardevaluation Forecast… Some analysts believe that China will be buying gold gradually without doing any sensitive damage to the American currency because otherwise Chinese people will also suffer from it because it may lead to devaluation of a part of the reserves they are holding in US Dollars.

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